Economy Is Poised To Grow But It Needs A Reality Check And Policies Based On High-Quality Data

After ten years of governing with a full majority, Prime Minister Narendra Modi will now lead a coalition government with the Telugu Desam Party and Janata Dal (United) as influential allies. Experts believe that the coalition will not significantly alter the new government's economic agenda but attracting investments, making labour a more active contributor to growth, and centralization of resource management and distribution need more attention.

Given the resilience and strong growth prospects of the Indian economy, the economic agenda should support momentum in manufacturing and services, revival in private consumption, investment activity, infrastructure spending, and kindle optimism in business sentiments.

“I think the size of the economy will expand and per capita incomes will also rise if you manage to grow at this rate till the end of the decade,” says Dharmakirti Joshi, Chief Economist at CRISIL- an S&P Global Company.

Conditions are ideal.

The Reserve Bank of India has raised the GDP growth forecast for the current fiscal year to 7.2 percent from 7 percent, citing increased private consumption and a resurgence in rural demand. Although food inflation remains a concern, there is expectation that the RBI might cut rates to boost growth. Bank of America recently termed the Indian rupee as one of the most stable currencies in the world because of RBI’s policy stability.

A report from broking firm Motilal Oswal says corporate profit to GDP ratio for the Nifty-500 companies rose in FY24 to 4.8%, a 15-year high. That means India Inc may be poised like how it was in 2004 when the Manmohan Singh government took office.

The ratio for all listed and unlisted firms had slipped from 7.9% in FY08 to 1.9% in 2020 before reviving. Nifty-500 companies’ profits surged 30% in FY24, the same rate at which they grew in 2003-2008, the report said. All that is needed to lift GDP growth is private capex.

“If the private sector is not stepping in with investment, the government will have to step in with the investment. If they're going to do capex through the public sector enterprises, the role of the public sector in the general economy is going to expand,” according to political economy analyst Shankkar Aiyar.

In The Core Report: Weekend Edition, financial journalist Govindraj Ethiraj spoke to Dharmakirti Joshi , Shankkar Aiyar and Yamini Aiyar, former President and Chief Executive of the Centre for Policy Research about the possible economic agenda of the newly elected government.

Edited excerpts:

CRISIL does reports that look at economic outlook or provide an economic outlook on the medium term. I think you call it the Growth Marathon. So what are you presently looking at or have been highlighting?

Joshi : I think we do medium term projections for the economy, and I think we've used the solo framework which looks at the role of capital, the role of labour and the role of efficiency in driving medium-term growth. And our forecast is 6.7% per annum till the end of this decade, which is actually not very different from what we achieved in the decade before the pandemic—India grew at 6.6% per annum. But the difference would be because the size of the economy has become larger, so even maintaining that growth rate yields compounding benefits for the economy.

Investment to GDP ratio is rising, and the public investments, the household investments, both have contributed to it. I think there is a way for private investment to become broad based, but investment seems to be the key driver of growth over the medium run.

I think the second driver is efficiency and the third is labour. Now the contribution of efficiency is about 30%. Now, the contribution of labour to this growth is the least, which is 17%. And I think the reason for that is that women's participation in the labour force is very low. And I think the economy is more capital driven and automation, et cetera, are reducing the need for people in general to fuel growth. So the contribution of labour continues to remain quite low and I think is projected to remain low unless I think you take steps to improve that.

Labour levels or the quality of labour has to improve. It has become more productive and will therefore contribute to higher growth or keep growth where it is today. So what's holding us back?

Yamini : First and foremost at a policy level and at a political level, acknowledgement of the problem. I think part of the challenge, particularly in the last few years, has been a refusal to recognise that the economy is on a twin path. There's a formal economy that has in fact been able to not just recover, but also partly gain from both the COVID crisis as well as, to a degree, GST. But it has had a shock impact.

But the pathway to formalisation is a lot more complex and needs more engagement. Where we really erred is in not knowing what the economy looks like today. We don't have a census. We suppressed large amounts of critical data, including the consumption expenditure survey. Right now we only have unit level data where the argument is on poverty levels increasing or decreasing, which frankly is not the key issue. The key issue is what does a consumption basket look like and where are the points at which people are hurting so that one can get a better understanding. The periodic labour force survey data gave us some indications of the extent to which we are seeing this reversal. Structural transformation in agriculture and self-employment generating jobs— recognizing the implications of that, and then also being open to learning from experimentation that is happening at the sub national level.

So, for example, this attempt at free bus rides in states, what is it doing to the labour market? We need to carefully study this, engage with it, understand it, in order to see whether it's addressing this big challenge of female labour force participation, which will take us forward quite a bit.

So really the first thing the government needs to do is to shed its intolerance towards data that may give it a slightly less than happy picture of what's been happening. Because minus that, where are the tools to make policy?

The factors of inflation are different in India compared to other countries. Now, is that only linked to weather or because it's been around for a while and consistently rising, isn't it?

Joshi: I think agriculture is very closely related to weather. So I think the persistence of high food inflation is related to weather. When it started in 2022, the heat wave actually reduced the wheat output. And after that, the global shortage and several things played out. Today, the problem is the most volatile component, which is vegetables. Vegetables are witnessing 27-28% inflation right now. The central banks typically ignore the shock from food as transitory. But if the shock persists—food has 39% weight in the consumer price index—the central bank is not going to ignore persistent high food inflation. It will have to respond. And the only tool it has is interest rates. So that is how it is playing out right now.

What does your projection tell you in terms of overall labour to employment or unemployment at this point of time?

Joshi: I think we don't measure employment-unemployment in this framework. But the issue is that you will have to improve the quality of labour so that it is able to participate in the growth process. The quantity of labour is there. You have highly skilled people. You also have unemployable people. You have to raise the (skill level of) unemployable people up, so that they can participate in the growth process. I think there is a skill gap in the economy. But even in services (there are opportunities) if you focus on health, education, childcare, etc–they are also women-centric. Other labour-intensive segments like food processing will help you tame food inflation also over the long run. So there is a scope to elevate the labour quality up. I think that happens through education and through skilling.

Your view from a numbers and a macro point of view as you look ahead because we're talking about continuing the economic agenda, the role of the private sector in let's say stepping up to the table on investments and particularly large investments. How are you seeing it?

Joshi: Well it's not that private investment is not picking up. It's picking up but not fast enough. I think crowding-in has happened but in only a few segments. I mean, for instance, if the government builds infrastructure, the demand for steel and demand for cement rises. I think that we have seen directly that the steel and cement firms are doing quite well. PLI (production-linked incentive) is helping electronics and pharmaceutical segments.

The nature of private investment is also undergoing a change. I mean there are legacy sectors and there are forward-looking sectors. So you will see greater incremental investments in the private sector in areas like electric vehicles, in areas like semiconductors for instance, and green energy related (sectors). CRISIL’s estimate was that about 17%-18% of the delta of industrial investment by the private sector will be in these areas.

I think the private sector not only in India but in other parts of the world also worries about the Chinese overcapacity. So they want to be clear on the tariff regime that is likely to play out. If China has excess capacity, it's going to flood the markets everywhere. So that’s also on the minds of private investors.

And the NCLT process has also taken some of the froth out of private investment. It's true that people are worried about losing their funds, if they (borrowers) don't pay the debt back. So that has also reduced the over-investment that took place before the global financial crisis and even after the financial crisis. In both the cases, private investment turned into non-performing assets because it was too exuberant. I mean, that kind of froth is not there right now.

If you were to look at the pros and cons of, let's say, centralization in resource management, resource distribution, and maybe other macroeconomic policy decisions, what would you say today has worked and not worked ?

Shankar: When you have to roll out something like Jan Dhan, then it works. But will you have to distribute, redistribute taxes, then there are/were gaps. And you know, the fact that the north versus south debate came in.

So the essential thing here is that the North-South debate came up only because there is a growing trust deficit between BJP-ruled states and the non-BJP-ruled states. And that is because I think the consultative process of the National Development Council or the Planning Commission or whatever the NITI Aayog’s platform was called, Clean India idea, all of them sort of faded. Some of it may have been due to Covid, but thereafter there's been a very little follow up. What is required is some kind of conversation between states, chief ministers and on issues, best practices, all of that.

I'm not very optimistic whether things will change in the future just because there are two parties in the coalition.

The issue is also about how much money the Centre collects in different ways. One of the issues is CESS and surcharge, which is not shared. So there is the issue of how resources are mobilised, how they are distributed, how they are used.

There needs to be a conversation, a peer group conversation between chief ministers. The Niti Aayog, which has been sort of missing in action for the better part of five years now, may have to step up and create a platform for the conversation.

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